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Thursday, 5 June 2014

European Central Bank Takes a Radical Step - the so-called negative deposit rate -

European Central Bank Takes a Radical Step - the so-called negative deposit rate - 

The European Central Bank cut its benchmark interest rate to a record low on Thursday and, in an unprecedented attempt to stimulate the euro zone economy, said it would begin charging interest on deposits held by the bank.

The so-called negative deposit rate has never been tried on such a large scale and is a bid to push down the value of the euro and encourage banks to invest excess cash rather than hoard it in central bank vaults.

The European Central Bank cut its benchmark interest rate to 0.15 percent from 0.25 percent, and the deposit rate to minus 0.10 percent from zero. The rate cuts will take effect next week, on June 11.

A produce merchant at a food market.Europe Struggles to Avoid Deflation’s GripJUNE 3, 2014
Mario Draghi, head of the European Central Bank, said on Thursday that interest rates would stay low for an extended period of time.European Central Bank Makes a Surprise Rate CutNOV. 7, 2013
The central bank said it would announce further measures later on Thursday “to enhance the functioning of the monetary policy transmission mechanism.” Analysts have speculated that those additional measures could include offering banks a new round of long-term loans at the benchmark rate, perhaps with strings attached to ensure that the money finds its way to businesses and consumers.

The interest rate cuts, including the move to a negative rate on deposits, had become all but certain after data earlier in the week showed that inflation in the euro zone fell to an annual rate of 0.5 percent in May, a level considered perilously low.

The fear is that the minuscule rises in wages and prices could lapse into outright declines — an economically debilitating condition known as deflation that is characterized by a downward spiral of prices, corporate profits and hiring. Deflation has already plagued the economies of several of the weaker euro zone countries, including Greece.

“Ultimately the macroeconomic consequences of a small negative rate are likely to be minimal,” Luke Bartholomew, a fund manager at Aberdeen Asset Management, said in a note after the central bank’s announcement, “But it should put downward pressure on the euro and it is an important signal of the ECB’s deflation fighting intent.”

Imposing a negative deposit rate is meant to give a positive jolt to the euro zone economy. In the annals of central banking, though, negative deposit rates have rarely been tried. Denmark had one until April, but the impact on an economy as large as the euro zone’s is largely unknown.


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